Sell Pitti Laminations; target of Rs 50: ICICI Direct

In the past year, the performance has been subdued primarily on the back of a write-down of high cost inventory and a sharp decline in scrap prices - key contributor to EBITDA margins. Henceforth, FY16 was a washout year for Pitti with the company reporting a substantial loss at the PAT level (Rs 9.6 crore). Export volumes also declined sharply by 27% YoY to 5717 tonne in FY16 on account of a ramp down in volume offtake by it key customer i.e. GE. Going forward, as the raw material and scrap prices stabilise we expect profitability to return for Pitti in FY17E.

Pitti has a good track record of supplying products to GE Group and also bagged a 10 year contract from GE India for supplying laminations for locomotives to be manufactured by GE for Indian Railways (2018-30). All this provides good revenue visibility in FY16-18E. However, the company lacks balance sheet strength and return ratios. As of FY16, Pitti has a debt of Rs 163 crore with elongated working capital cycle of 170 days. Pitti has dismal return ratios with RoE & RoCE at 10%. Going forward, in FY16- 18E, we expect sales to grow at a CAGR of 12.6% to Rs 395.2 crore in FY18E. On the PAT front, we expect Pitti to report PAT of Rs 12.3 crore in FY18E vs. loss of Rs 9.6 crore in FY16. We have valued Pitti at Rs 50 i.e. 11x P/E on FY18E EPS of Rs 4.5/share and assign a SELL rating to the stock.